Category Archives: Global Financial Markets

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Interesting post here in FTAlphaville by Matthew C Kein. I would dispute the point about openness or closedness of rich Countries’ economies, which isn’t really a true issue. But I’d agree that future economic growth policies will run into trouble if they address only demographic issues. What is stricking and important is the question of the ratio of Business saving rates vs Household saving rates: this seems clear explanation for the paltry and inadequate Investment levels in high-income rich countries for the past 20-30 years. There can no be further doubt the growth must come with a change in the investment outlook for all these countries; there must be some kind of trigger for this to happen, but I’m without a clue about where this should come from, and when we look back in History we don’t want that to be in the form of wider conflict on a World scale…

Here some nice excerpts from the posts:

Like Japan, we too had a big financial crisis caused by excessive private borrowing and bad investment decisions. Like Japan, our non-financial corporate sectors have sharply raised their net savings rates, assuming they hadn’t already done so after the excesses of the late 1990s. And finally, like Japan, the rich world as a whole is a relatively closed economy, which means domestic factors should matter a lot more than international ones when it comes to explaining underlying inflation and wage trends.

(…)

By contrast, the share of Americans in work, across all age cohorts except the elderly, remains significantly below the pre-crisis level, much less the heyday of the late 1990s. As Martin Wolf noted recently, America has the dubious distinction of being the only big rich country to experience falling labour participation rates for women in their prime working years.

The expected changes in the rich world’s population structure will clearly have big effects on society, politics, and the distribution of resources from young to old. It’s possible these changes could lead to big upward shifts in discount rates and workers’ share of output, although Japan’s experience suggests the opposite could be even more likely. Either way, any long-term prediction based solely on demographics is likely to run into trouble.

My edge today will focus in the issue of China and its relevance in the Economic world stage. It is known in the current influential circles the imbalances to the Global economy of the chinese currency peg to the US Dollar, or its massive size of Foreign Exchange reserves or the way that the uncertainty about its role in the Global aggregate demand distorts expectations and the stability of Financial Markets.

But less is said about the details of its Economy. We maybe could get a good glimpse by an analysis of its renminbi (RMB) Exchange rate Policy like this piece of FT’s Gavyn Davies blog post. In it we see how the current Global Financial Markets, specially the funding for the massive credit markets search for profits that in part is supported by Chinese capital investment obsession of the last two decades :

”China’s exchange rate policy has, of course, always been a controversial matter. After a decade of deliberate undervaluation, intended to promote export led growth, China finally succumbed to international pressure in 2005, and allowed the real value of the renminbi (RMB) to start rising. Since then, it has risen by about 30 per cent, with only one interruption in the aftermath of the great financial crash.

The new prices data suggest that the renminbi is now approximately fairly valued. Arvind Subramanian and Martin Kessler have already crunched the numbers, and have concluded that the average level of prices in China is almost exactly where it should be compared to the US, allowing for the economy’s relative level of development. Other methods produce slightly different results, but the conclusion that the currency is no longer substantially undervalued seems robust.

In this respect, China has been a good global citizen in recent years, no doubt in part because a rising exchange rate helped with its domestic objectives by boosting consumption. The rising RMB has helped to reduce the huge trade imbalance between the US and China, and taken some of the pressure off other emerging economies whose competitiveness was under threat.

The inexorable rise in the RMB has also led to burgeoning “carry trades”, involving a surge in short-term capital flows into the onshore market in mainland China. This has been a two-edged sword. It has provided a source of funding for the financial system, at a time when more credit was needed to disguise the stresses in the highly indebted local government and corporate sectors. But it also extended the internal credit bubble even further into unsustainable territory, and forced China to intervene even more heavily in the foreign exchange markets to keep the currency down. ”

But as Martin Wolf and David Piling point out in another FT’s article, the game will most probably change, not least in part due to internal pressures by the chinese economy to adapt to new realities but also because there’s a real need to address the international pressures to Growth in the economies of the Western Countries. In the real world economy, nothing is really created new, everything is transformed to bring about balance and change…. If there are imbalances that probably means that something will need to change to restore Balance.

This is further underscored by the debate about the rise of China as the World’s largest economy on a GDP measure only ( adjusted for Purchasing Power Parity the chinese economy is still a relatively poor Country): ”Nevertheless, China is still a poor country: the purchasing power of its GDP per head was 99th in the world. Since China also invests close to half its output, relative consumption per head was lower still.” says Wolf in the article. And on such measures as Technological intensity of its economy, productivity of services sectors, quality of its Political and Academic institutions, China like most emerging countries still lags behind the advanced economies by a significant amount. Correctly pointed here by David Piling:

”China is a middle-income country at best, with per capita income somewhat below that of Peru. Its technological capabilities are far behind the US and other western economies, including historic adversary Japan. Militarily it has nothing like the global clout of the US. Its powers of persuasion are also lacking. China does not have a sufficiently attractive political system to influence global opinion. Its closest allies are the likes of North Korea and Pakistan. Mao Yushi, the 85-year-old economist who is considered one of the intellectual authors of China’s economic modernisation, takes a studiously realistic view of the new numbers. He accepts that China is the world’s biggest economy but considers this to be nothing more than a reflection of the fact that it is home to 1.36bn people, more than any other nation.

With all this good judgment, there’s no way to escape an important reality. The rise of China to the World economic stage changed the Global Economy signficantly and promises to continue to do so. To say the least, any informed and responsible Economist or analyst must not ignore the news about developments in the Chinese economy for many years to come, whether in the short-term or in the medium to long-term.